[The Editors' Verdict]Another Shift in the 'Unsold Housing Red Line'

Minister Won Hee-ryong "Prepared for 100,000 Households"
Raised by 38,000 Households in Three Months

"We are prepared for up to 100,000 unsold housing units." Recently, a statement by Won Hee-ryong, Minister of Land, Infrastructure and Transport, at a symposium has caused a stir. This remark officially confirmed the long-rumored "100,000 unsold units theory" by the head of the real estate ministry. Since the end of last year, this concern has escalated fears that if realized, it could trigger a chain of bankruptcies among construction companies. After all, from 2008 to 2009, when unsold units exceeded 100,000, a series of construction company bankruptcies followed.

However, looking back just three months ago at the end of December last year, the situation was different. At that time, Minister Won stated, "We consider 62,000 unsold apartments as the danger threshold." This meant that as unsold units increase, construction companies’ debts accumulate, and surpassing 62,000 units would inevitably lead to more companies unable to manage their debts. According to statistics released by the Ministry of Land, Infrastructure and Transport three days later, as of the end of November last year, the nationwide number of unsold houses was about 58,000, nearly reaching the critical limit. This shows how seriously the government perceives the unsold housing crisis.

Yet, just over a month later, on February 1 of this year, Minister Won said, "Currently, unsold units are not at a danger level but at an interest stage, about a yellow light." Was this statement made because the number of unsold units had fortunately decreased? However, the unsold units reported at the end of December last year were 68,000, already exceeding the initially set 'red line.' The figure for January this year rose further to 75,000 units. Nevertheless, Minister Won explained the reason for the 'yellow light' by saying, "Most of the unsold units are piled up in local areas," and "We should not consider all unsold housing with poor profitability as malignant."

The same applies this time. In a lecture on the 21st, Minister Won said, "Sixty percent of the recent surge in unsold units in Daegu are held by large corporations, so the amount that could translate into a company’s financial crisis is minimal." This suggests he believes that the current unsold housing stock is unlikely to worsen the real estate market downturn or lead to financial market instability.

However, this differs from the analysis by the Bank of Korea. According to the Bank of Korea’s 'Financial Stability Report' released on the 23rd, more than one in three listed construction companies in Korea are at the limit where even operating profits cannot cover interest payments. For local small and medium-sized construction companies, the risk of insolvency is estimated to be higher compared to large corporations and construction companies in the Seoul metropolitan area. Particularly, the exposure to real estate project financing (PF) risk in the non-bank sector amounts to about 115 trillion won, raising the possibility that if contingent liabilities materialize, it could trigger a chain of defaults in the financial sector.

However, the recent atmosphere in the metropolitan area market is quite different. Since the government introduced various deregulation measures this year, the decline in housing prices has moderated, and future outlooks have improved, leading to the emergence of theories about the real estate market bottoming out. This might explain Minister Won’s change in stance. However, there is concern that his reasoning?that since 60% of the malignant unsold units in Daegu belong to large corporations, the market will be fine as long as these corporations remain stable?is overly simplistic. Who owns the remaining 40%? Wouldn’t that mostly include small and medium-sized enterprises and mid-sized companies?